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Director tools

This is part of a series of Director Tools prepared by the Australian Institute of Company Directors. The tools have been designed to provide our members with general information and as a starting point for undertaking a board-related activity. These tools are not designed to replace legal advice or a detailed review of the subject matter nor are they intended to cover all circumstances where such a tool might be considered appropriate.

Board Charters
Introduction
Board charters have become a popular tool for boards to rst discuss and then document the policies and guidelines that guide governance for their particular organisation. The governance framework for most organisations is rst set out by the act of parliament which allows the creation of the organisation, for example, the Corporations Act 2001, and then the constitution, which provides greater legally binding detail on governance matters. There may also be other legally binding contracts among the owners and/or between the owners and the directors, which specify governance details, such as a shareholders agreement. However, there are many aspects of modern governance which are important for the board to have considered and agreed how they will act, but where it is either undesirable or unnecessary to have such aspects codied contractually. Documenting these governance arrangements is the role of a board charter. A board charter is dened as: A written policy document that clearly denes the respective roles, responsibilities and authorities of the board of directors (both individually and collectively) and management in setting the direction, the management and the control of the organisation. Board charters have become an accepted part of the governance landscape. Many major inquiries, reports and leading practice recommendations refer to the need for board charters in delivering effective governance. For example: Boards should adopt a formal statement of matters reserved to them or a formal board charter that details their functions and responsibilities.
ASX Corporate Governance Council, 2010, Corporate Governance Principles and Recommendations, p.13

Entities should develop and implement a Governance Policy [A]n entity might like to consideras part of their Governance Policy a board charter.
Standards Australia, 2003, Good Governance Principles, 2.2.2

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Board Charters
A board charter serves a number of important functions: As the top level policy document - Serves as a reminder for the board of the legal framework within which it operates. - Documents the policies that the board has decided upon to meet its legal and other responsibilities. - Assists the corporations leadership in delivering good governance. - Allows communication of the boards policies and expectations to management. - Provides guidance and comfort to shareholders that the board has implemented robust governance processes. - Is a point of reference for disputes. - Serves as an induction tool for new directors and senior managers. As a top level process. - Ensures that boards focus on how they can continuously improve their governance processes for the benet of the organisation. - Provides a forum to discuss some hard-to-mention governance issues. - Serves as a team development technique for both board members and senior management, to clarify roles and expectations.

The content of a board charter

Companies have considerable discretion regarding the contents of a board charter. Some organisations seek to have a brief document, touching generally on major governance issues but avoiding being overly prescriptive. Other companies see the board charter as the top level policy document for the organisation and require the document to address a wide range of governance issues. In Australia, there are at least two overarching frameworks which have been widely used for preparing board charters: 1. Board charters that follow the structure of the ASX Corporate Governance Principles and Recommendations 2. Those that follow the model put forward by Geoffrey Kiel and Gavin Nicholson, in their book on board charters, Boards that Work. Charters that follow the ASX Corporate Governance Principles and Recommendations deal with the eight principles of corporate governance and the recommendations. While these are geared towards listed entities, the vast majority of the recommendations are also seen as having wide governance application. Appendix 1 contains a listing of the ASX guidelines and the various policies and documentation recommended by the guidelines.

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This provides one checklist of areas to consider, either for the board charter itself or associated policies. Not all the policies and documents suggested in the ASX guidelines need go in to the board charter itself. The charter might provide an overview of the companys policy in a particular area and a reference as to where the major policy, such as a diversity policy, can be found. A complete set of policies and documents in board charter format which meet the requirements of the ASX Corporate Governance Council Principles is available see reference 4 in Further Reading. Charters based on the Boards that Work model have four major sections: 1. Dening governance roles requires the board to elaborate on the role of the board, policies related to board composition and the specic expectations of the various key governance players 2. Key board functions outlines nine key roles which the governance literature suggest are central roles of all boards 3. Improving board processes concentrates on the actual activities of governance policies in relation to the conduct of board meetings, board papers and the role and function of committees 4. Board effectiveness reviews a range of activities required to ensure that directors are best equipped to undertake their role. Table 1 contains the 26 topics under the Boards that Work model where it is suggested that boards discuss and dene their policies.
Table 1: Board charter headings based on the Boards that Work model

Dening governance roles Board composition

Key board functions

Improving board processes Board meetings

Board effectiveness

The board and strategy

Director protection

Role of the board Role of individual directors Role of the chair Role of the company Secretary Role of the CEO

The board and the CEO

Board meeting agenda

Board evaluation

Monitoring

Board papers

Director remuneration

Risk management

Board calendar

Director selection

Compliance

Committees

Director induction

Policy framework

Director development

Networking Stakeholder communication Decision-making

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Board charter development

For many companies, the requirement for a board charter has become just another compliance checklist item, delegated to the company secretary or company lawyers to write, so that the company can tick the box. Taking this approach means that one of the key benets of a board charter the opportunity for directors to discuss how they want governance in their organisation to operate to improve organisational performance is lost. To develop a board charter that adds value, the following ve-step process is recommended by Professor Geoff Kiel, Chairman, Effective Governance Pty Ltd. Step 1: Collect information Document existing board policies and governance practices, including position statements and duty descriptions for key governance personnel, a copy of the companys constitution and any board policy documents. In larger organisations there will be many policy documents to consider, while some small companies may have no documented policies. In either case, the other task at this stage is to document the unwritten practices that regulate corporate conduct. During the information-gathering stage, the board may choose to delegate the majority of the work to a single individual or small group. Depending on the size of the organisation and the experience of individual directors, it may be appropriate to delegate the task to the company secretary, for example. Step 2: Analyse documentation Analyse the documentation to identify any discrepancies between existing board policies and current practice, as well as areas where no formal policies exist and existing policies that may not conform to normative advice on good practice. Step 3: Draft charter Provided the entire board takes part in discussing the relevant charter policies and guidelines, the initial task of drafting the charter may be delegated to one person, such as the company secretary. A common question boards ask is whether or not outside expertise is required to assist in charter development. This will depend on such factors as the size of the company, the complexity of the governance framework and the ability of governance personnel, in particular the company secretary, to devote the necessary time to the task. Step 4: Board approval process As the board as a whole is responsible for the governance practices of the organisation, its role is to approve or not approve what is placed before it. This means that the board should approve any new policies, whether they are charters, codes or other documents the organisation wishes to adopt. It may require several attempts before the board is ready to approve the board charter. Presenting a draft charter gives the whole board a chance to have a say, and gives each director a sense of ownership of the nal document. Step 5: Annual review An annual review of the board charter is recommended. This approach keeps the charter current and raises the directors awareness of the organisations overall policy framework.

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Further reading
Further information on Board Charters can be found at: ASX Corporate Governance Council, 2010 Corporate Governance Principles and Recommendations with 2010 Amendments, www.asx.com.au/ governance/corporate-governance.htm. Boards that Work: A New Guide for Directors 2003, Kiel, G.C. & Nicholson, G.J., McGraw-Hill, Sydney Boards that Work 2012, Kiel, G.C., G.J. Nicholson, J. Tunny & J. Beck, Thomson Reuters, Sydney The ASX Corporate Governance Councils Principles: A Compliance Toolkit, Rev. 2nd edn, Effective Governance Pty Ltd 2011, Kiel, G.C., K. Kiel-Chisholm & J. Beck, Brisbane

Appendix 1
Frameworks and content for a board charter based on the ASX Corporate Governance Principles
ASX Principle and recommendations Policies/documents to be drafted

1. Lay solid foundations for management and oversight Recommendation 1.1: Companies should establish the functions reserved to the board and those delegated to senior executives and disclose those functions. Principle functions and responsibilities of the Board Delegations to management The role of individual directors Letter of appointment on non-executive director Letter of appointment for CEO Letter of appointment for CFO Job description for CEO Job description for CFO Recommendation 1.2: Companies should disclose the process for evaluating the performance of senior executives. CEO evaluation policy Senior executive evaluation policy

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ASX Principle and recommendations 2. Structure the board to add value Recommendation 2.1: A majority of the board should be independent directors.

Policies/documents to be drafted

Board composition policy Board structure policy Maximum term of directorship

Recommendation 2.2: The chair should be an independent director. Recommendation 2.3: The roles of chair and chief executive officer should not be exercised by the same individual.

Chair an independent director (see board structure policy) Separate role of chair and CEO (see board structure policy) Lead independent director (see board structure policy) Nomination committee charter Board composition policy Board structure policy Election of directors policy Vacation of office policy Draft resolutions for appointing directors where enough vacancies on board for all nominees to be elected Draft resolutions from appointing directors where more directors than vacancies Term of directorship policy

Recommendation 2.4: The board should establish a nomination committee.

Recommendation 2.5: Companies should disclose the process for evaluating the performance of the board, its committees and individual directors.

Board, director and committee evaluation policy Director induction Director development Access to independent professional advice procedure Access to the company secretary procedure CEOs report Information seeking protocol

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ASX Principle and recommendations

Policies/documents to be drafted

3. Promote ethical and responsible decision-making Recommendation 3.1: Companies should establish a code of conduct and disclose the code or a summary of the code as to: The practices necessary to maintain confidence in the companys integrity. The practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders. The responsibility and accountability of individuals for reporting and investigating reports of unethical practices. Recommendation 3.2: Companies should establish a policy concerning diversity and disclose the policy or a summary of that policy. The policy should include requirements for the board to establish measurable objectives for achieving gender diversity for the board to assess annually both the objectives and progress in achieving them. Recommendation 3.3: Companies should disclose in each annual report the measurable objectives for achieving gender diversity set by the board in accordance with the diversity policy and progress towards achieving them. Recommendation 3.4: Companies should disclose in each annual report the proportion of women employees in the whole organisation, women in senior executive positions and women on the board. 4. Safeguard integrity in nancial reporting Recommendation 4.1: The board should establish an audit committee. Audit committee charter Procedure for the selection and appointment of external auditor Procedure for the rotation of external audit partner Diversity policy Company code of conduct OR Code of conduct for directors and senior executives Expectations of directors policy Emergency contact procedures policy Whistleblowing policy

Procedure on the disclosure of gender diversity

Procedure on the disclosure of gender diversity

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ASX Principle and recommendations Recommendation 4.2: The audit committee should be structured so that it: consists only of non-executive directors Consists of a majority of independent directors. Is chaired by an independent chair, who is not chair of the board. Has at least three members. Recommendation 4.3: The audit committee should have a formal charter. 5. Make timely and balanced disclosure Recommendation 5.1: Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies. 6. Respect the rights of shareholders Recommendation 6.1: Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy. 7. Recognise and manage risk Recommendation 7.1: The board or appropriate board committee should establish policies on risk oversight and management.

Policies/documents to be drafted Audit committee charter Audit committee structure

Audit committee charter

Continuous disclosure policy Periodic disclosure policy Share trading policy

Shareholder communications policy

Risk management policy Risk profile Risk management committee charter

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ASX Principle and recommendations Recommendation 7.2: The board should require management to design and implement the risk management and internal control system to manage the companys material business risks and report to it on whether those risks are being managed effectively. The board should disclose that management has reported to it as to the effectiveness of the companys management of its material business risks. Recommendation 7.3: The board should disclose whether it has received assurance from the chief executive officer (CEO) and the chief nancial officer (CFO), or their equivalents, that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to nancial reporting risks. 8. Remunerate fairly and responsibly Recommendation 8.1: The board should establish a remuneration committee. Recommendation 8.2: Companies should clearly distinguish the structure of non-executive directors remuneration from that of executive directors and senior executives.

Policies/documents to be drafted Risk and internal control assurance Internal audit function policy

CEO and CFO assurancee

Remuneration committee charter

Senior executive remuneration policy Non-executive director remuneration policy

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